Statement at the Conclusion of the 2008 Article IV Consultation Mission to Vietnam

Mr. Ben Bingham, Senior Resident Representative of the International Monetary Fund (IMF), made the following statement on December 18 in Hanoi:

"An IMF staff team led by Mr. Shogo Ishii, Assistant Director in the Asia and Pacific Department, visited Hanoi during December 3-18 to conduct the 2008 Article IV Consultation1 discussions. The team took stock of recent economic developments, and exchanged views on the economic outlook, and the implications of the global economic slowdown for Vietnam. Based on these discussions, the team will prepare a staff report, which is expected to be presented to the IMF's Executive Board in early March. The staff will seek the authorities' approval to publish the report shortly thereafter.

"Following several years of strong performance, Vietnam's economy is facing a number of challenges. After accelerating in 2007, growth momentum eased over the course of 2008, as the government sought to stabilize an overheating economy. While the government made commendable progress in stabilizing the economy, Vietnam has, more recently, begun to experience adverse effects from the global economic slowdown. Exports of goods and services are slowing, reflecting a downturn in key trading partners' economies. Private remittances and foreign direct investment, two major factors supporting economic activity in 2007, are also slowing from high levels, as a result of the deterioration in global economic conditions. These external challenges are compounded by domestic challenges stemming from a large current account deficit, as well as weaknesses in the banking and corporate sectors.

"Against this background, the team provided the following preliminary assessment of Vietnam's economic outlook:

• In view of the deteriorating global environment, staff project economic growth to ease to 6¼ percent in 2008, from 8½ percent in 2007, and slow down further to 5 percent in 2009.

• With commodity prices falling, headline inflation is expected to drop to single digits by end-2009, although core inflation (excluding raw food and energy) could fall more gradually.

• The external current account deficit is projected to decline, with a decline in imports offsetting lower exports and private remittances, but it will remain large (9 percent of GDP) in 2009, and remains a source of vulnerability given Vietnam's relatively low international reserves (three months of imports).

"With the outlook for global economic growth expected to be marked down further in coming weeks, the risks to this outlook are predominantly on the downside. A deeper, more prolonged global economic downturn would have a material impact on exports and private remittances, and hence economic activity and the balance of payments. These pressures could be exacerbated, if worsening global financial conditions further reduced foreign direct investment and other capital inflows. Finally, slower economic activity could heighten vulnerabilities in enterprises and the banking system.

"Policy discussions focused on how best to navigate the economy safely through this severe global economic downturn. There was a broad agreement that the balance of risks had shifted from inflation to growth, and that this had prompted the government to respond by easing monetary and fiscal policies. However, the team emphasized that Vietnam's external position is not as robust as other countries in the region, and that this would constrain the government's ability to pursue expansionary policies. While some stimulus may be warranted, if economic prospects continue to deteriorate, such stimulus will need to be carefully calibrated, and give priority to protecting the vulnerable. In this context, the team cautioned that government plans for a large stimulus package-reportedly up to $6 billion-may result in an undesirable weakening of the external position in the absence of additional external financing.

"The team noted that strains in the banking system had increased in 2008, and that these strains could increase further in 2009, as economic activity slows. While increased capital and provisioning in 2006-07 have provided an adequate buffer, especially in the larger joint stock banks, banks' financial position would likely weaken in 2009. Thus, the team urged the authorities to prepare for rising vulnerabilities. In this regard, the team was encouraged by the steps that the State Bank of Vietnam (SBV) had taken to strengthen its oversight of the banking system.

"With regards to the medium term, the team re-emphasized that the outlook remained favorable, provided that the government maintained sound policies and continued reforms to enhance Vietnam's competitiveness. Maintaining the momentum of reforms through this difficult period is important to bolster investor confidence, and ensure that Vietnam is well positioned when the world emerges from the current global economic slowdown.

"Lastly the team emphasized the need to improve data quality and communication. This was particularly important at this juncture, as the ability to craft an appropriate policy response to the global downturn rests largely on the quality of information available to policy makers. While the SBV has made progress to improve the quality and timeliness of monetary and reserve data, significant gaps remain in the data available on fiscal, state-owned enterprise, and banking operations."

1 Under the Article IV Consultation, IMF staff undertake annual surveillance of economic developments and policies of member countries for discussion by the IMF Executive Board. The last Article IV Consultation with Vietnam was concluded on October 26, 2007.